## _043013a

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### Executive summary — FY 2013 income position and key projections
- FY 2013 net income is now projected at SDR 2.0 billion, including surcharges, broadly in line with the midyear estimate of SDR 2.1 billion.
- Precautionary balances are expected to reach SDR 11.5 billion at the end of FY 2013.
- Updated breakdowns and drivers:
  - Operational lending income (margin, service charges, and commitment fees): about SDR 1.5 billion; the current estimate is SDR 1,457 million (Table 1).
    - Margin for the rate of charge: SDR 919 million.
    - Service charges: SDR 157 million.
    - Commitment fees: SDR 481 million.
  - Surcharge income: SDR 1,242 million.
  - Investment Account (IA) income for FY 2013:
    - Fixed-income subaccount (reserves portfolio): SDR 58 million.
    - Endowment subaccount (gold profits portfolio): SDR 6 million.
    - Temporary windfall profits subaccount: SDR 0.036 million.
    - Total IA income: SDR 64 million (about SDR 9 million lower than the midyear estimate).
  - Reimbursements to the General Resources Account (GRA) in FY 2013:
    - Expenses of the SDR Department: SDR 1.149 million (to be recovered via assessment on participants in the SDR Department; proposed Decision 1).
    - MDRI-I expenses: SDR 0.019 million (proposed Decision 2).
    - PCDR Trust expenses: SDR 0.039 million (proposed Decision 3).
    - PRGT expenses to be reimbursed to the GRA: SDR 52.21 million (proposed Decision 4).
  - Net expenses are expected to be about SDR 22 million lower than projected.
    - Net administrative expenditures: projected about SDR 31 million lower than budgeted.
    - Lower capital project expenses (IT and facilities): about SDR 4 million lower.
    - Movements in the U.S. dollar/SDR exchange rate reduce the savings by about SDR 13 million.
  - IAS 19 timing difference: IAS 19 expense for FY 2013 of SDR 249 million versus funding projected at SDR 102 million yields a timing difference of SDR 147 million that decreases net income.
- Key statistics (as presented):
  - Net operational income position (A–B): SDR 912 million.
  - Net income position (IFRS basis): SDR 2,013 million.
  - Fund credit (average stock): 100.6 / 93.3 / 91.9 (SDR billions) as presented in Table 1.
  - SDR interest rate (average, in percent): 0.3 / 0.1 / 0.1.
  - US$/SDR exchange rate (average): 1.55 / 1.55 / 1.52.
  - Precautionary balances (end of period, SDR billions): 11.8 / 11.6 / 11.5.

### Disposition decisions and IA income treatment
- IA structure and use of IA income:
  - The IA has three subaccounts:
    - Fixed-income subaccount (funded by transfers of currencies from the GRA equivalent to the Fund’s total reserves in June 2006, plus subsequent transfers of GRA net income not associated with gold profits).
    - Endowment subaccount (funded with gold profits other than windfall profits).
    - Temporary windfall profits subaccount (funded by GRA currency transfers attributed to windfall gold profits, to be used to fund a partial distribution of the general reserve to the membership for the benefit of the PRGT).
  - Under the Articles, IA investment income may be invested, held in the IA, or used for meeting the expenses of conducting the business of the Fund.
  - Prior practice for the fixed-income subaccount has followed a two-step approach:
    - Transfer IA income from the fixed-income subaccount to the GRA to meet administrative expenses, increasing GRA net income and resources for placement to GRA reserves.
    - Increased reserves provide scope for further transfers of GRA currencies to the IA, expanding the IA corpus.

### Disposition of Investment Account (IA) subaccount income (staff proposals)
- Fixed-Income Subaccount (reserves portfolio)
  - Staff proposes that the estimated FY 2013 income of SDR 58 million be transferred to the GRA to be used towards meeting the expenses of the Fund (proposed Decision 5).
  - By so doing the IA income will contribute to the GRA net operational income, which will be placed in the Fund’s reserves.
- Endowment Subaccount
  - Staff proposes that the projected income of SDR 6 million be retained in the IA.
  - According to the Rules and Regulations for the Investment Account, no income from the endowment subaccount may be used for meeting the expenses of the Fund pending the completion of the phasing period, which is expected to start in mid-FY 2014.
  - No Board decision is required for reinvestment of earnings.
- Temporary Windfall Profits Subaccount
  - The income from this portfolio of about SDR 0.036 million will be retained in the IA until the partial distribution of the general reserve is executed in accordance with already approved Board decisions.

### Placement of GRA net income, surcharges, and transfers between GRA and IA
- Staff proposes that the GRA net operational income estimated at SDR 765 million be placed in the special reserve (proposed Decision 6).
- Staff proposes that net income equivalent to the FY 2013 surcharges estimated at SDR 1.2 billion be placed to the general reserve (proposed Decision 6).
- Projected precautionary balances at end-FY 2013 after transfers:
  - Total: SDR 11.5 billion
  - Special reserve: SDR 4.2 billion
  - General reserve: SDR 6.1 billion
  - SCA-1 balance: SDR 1.2 billion
- Note: The special reserve remains well below the SDR 10 billion floor established by the Board for precautionary balances.
- Transfers between GRA and IA; Fixed-Income Subaccount investment objective:
  - Consistent with past practice, staff proposes to transfer currencies equivalent to the increase in the general and special reserves of SDR 2.0 billion from the GRA to the IA for investment in the Fixed-Income Subaccount (the maximum amount permitted under the Articles).
  - Objective of the Fixed-Income Subaccount: achieve investment returns that exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12 month investment horizon.
  - While risks of under-performance have increased in the current low interest rate environment, staff proposes to transfer the maximum amount permitted under the Articles, currently estimated at SDR 2.0 billion to the IA for investment (proposed Decision 7).

### Margin for the basic rate of charge and FY 2014 outlook
- Decision on margin for basic rate of charge:
  - In April 2012 the Executive Board set the margin at 100 basis points for the period FY 2013–2014 under Rule I-6(4).
  - Staff concludes no change in the margin for FY 2014 is warranted (Decision 8) because there have been no fundamental changes in the factors relevant for establishing the margin.
- Updated projections for FY 2014:
  - Net income position of SDR 1.6–1.8 billion, compared with the April 2012 estimate of SDR 2.1 billion.
  - The updated projections reflect:
    - Lower lending income, primarily due to the expiration of arrangements with undrawn balances.
    - Lower non-lending income as a result of low global interest rates and the agreement to phase in investments under the new gold-sales funded endowment.
  - The projections are subject to considerable uncertainty and are sensitive to a number of assumptions.
- Intermediation costs and lending-related income (FY 2014 projections)
  - Intermediation costs for FY 2014 are projected at US$96 million.
  - Income from the margin is projected at about US$1.3 billion (earlier estimate US$1.5 billion; projected outcome for FY 2013 about US$1.4 billion).
  - Commitment fee income is projected at about US$29 million.
  - Surcharge income is projected at US$1.9–2.2 billion.
- Lending and interest-rate sensitivities
  - Average credit is now projected to be about SDR 88.2 billion in FY 2014 (some SDR 9 billion lower than projected last April).
  - The decline in average credit reduces income from the margin by about SDR 90 million, partially offset by increases in service charge and commitment fees of SDR 12 million and SDR 10 million, respectively.
  - Surcharge income is expected to generate about SDR 1.3–1.5 billion towards FY 2014 income.
- Market cross-check
  - EMBI spreads, adjusted for risk and term premiums, suggest the alignment of the current margin of 100 basis points with long-term credit market conditions is broadly in line with recent years.

### IA investment income, assumptions, and expected impacts
- IA investment income revisions
  - FY 2014 IA investment income is expected to be about SDR 264 million lower than estimated in April reflecting low global interest rates and the decision not to initiate pay-outs from the endowment until phased investment of the passively-managed gold portion is completed.
- Fixed-Income Subaccount assumed premium over SDR rate
  - Updated projections reflect an expected return over the SDR interest rate of 7 basis points (the previous estimates assumed 50 basis points).
  - Projections assume a gradual build up of the premium to 100 basis points by FY 17 following a phased approach for the investment mandate.
  - Short-term performance is subject to considerable uncertainty given low interest rates and the risk of rising interest rates.
- Interest-free resources and reimbursements
  - Implicit returns on interest-free resources are about SDR 15 million lower due to low global interest rates.
  - Projected reimbursements to the GRA have decreased by about SDR 12 million based on updated expenditure projections.

### Key consolidated figures (selected exact values)
- Fixed-Income Subaccount FY 2013 estimated income to transfer to GRA: SDR 58 million
- Endowment Subaccount projected income retained in IA: SDR 6 million
- Temporary Windfall Profits Subaccount income retained in IA: SDR 0.036 million
- Proposed GRA net operational income to special reserve: SDR 765 million
- FY 2013 surcharges to general reserve: SDR 1.2 billion
- Proposed GRA→IA currency transfer for reserves investment (maximum permitted): SDR 2.0 billion
- Intermediation costs (FY 2014 projection): US$96 million
- Margin income (FY 2014 projection): about US$1.3 billion
- Commitment fee income (FY 2014 projection): about US$29 million
- Surcharge income (FY 2014 projection): US$1.9–2.2 billion
- FY 2014 net income (updated projection): about SDR 1.6–1.8 billion
- Average fund credit (FY 2014 projection): SDR 88.2 billion
- IA fixed-income expected premium over SDR interest rate (FY 2014 projection): 7 basis points; gradual build to 100 basis points by FY 17
- Reduction in FY 2014 IA investment income versus April estimate: SDR 264 million
- Projected precautionary balances at end-FY 2013: SDR 11.5 billion (SDR 4.2 billion special reserve; SDR 6.1 billion general reserve; SDR 1.2 billion SCA-1)

### Burden sharing adjustments — findings and projections
- Given current levels of overdue obligations, sharply higher lending and the prevailing low interest rate environment, burden sharing adjustments remain at very low levels.
- The Board amended the decision on burden sharing in FY 2010 to take account of the low burden sharing adjustments and allow for a “carry-forward” of excess amounts generated from a minimum adjustment of 1 basis point to the rate of charge and the rate of remuneration.
- If the amounts brought forward are sufficient to offset deferred charges in subsequent quarter(s), no adjustments are necessary for such quarters. This occurred in the third quarter of FY 2013.
- Going forward, burden sharing adjustments are expected to remain low, with adjustments projected for the third quarter of FY 2014.
- Table 4 / recent rates (as presented):
  - Average SDR interest rate (in percent) series (FY06–FY13, FY14 projected): 2.93, 3.96, 3.64, 1.79, 0.29, 0.35, 0.30, 0.12, 0.08, 0.07, 0.10, 0.10, 0.14, 0.17, 0.15
  - Average basic rate of charge (in percent) series (FY06–FY13, FY14 projected): 4.00, 5.04, 4.72, 2.79, 1.29, 1.35, 1.30, 1.12, 1.08, 1.07, 1.10, 1.10, 1.14, 1.17, 1.15
  - Note: The SDR interest rates are projected to average 0.1 percent in FY 2014.
- Review of special charges — findings and decisions:
  - No special charges have arisen during FY 2013 and no new considerations have arisen during the financial year.
  - No changes are proposed to the current system (proposed Decision 9).

### Proposed decisions pertaining to FY 2013 and FY 2014 (summary of headings and adoption thresholds)
- Decisions pertaining to FY 2013:
  - Decision 1: assessment on SDR Department participants for reimbursement of General Department expenses for FY 2013.
  - Decision 2: reimbursement to the General Resources Account for cost of administering SDA resources in the MDRI-I Trust in FY 2013.
  - Decision 3: reimbursement to the General Resources Account for cost of administering SDA resources in the PCDR Trust in FY 2013.
  - Decision 4: reimbursement to the General Resources Account for cost of administering the PRGT in FY 2013.
  - Decision 5: transfer of income from the Investment Account to the General Resources Account for use in meeting FY 2013 administrative expenses.
  - Decision 6: placement of FY 2013 net income to the Fund’s Special Reserve and General Reserve.
  - Decision 7: transfer of currencies from the GRA to the Investment Account equivalent to the increase of the special and general reserve as a result of placement of FY 2013 net income.
- Decision pertaining to FY 2014:
  - Decision 8: maintains the rate of charge on the use of Fund resources for FY 2014 at 100 basis points over the SDR interest rate.
  - Decision 9: reviews the system of special charges.
- Adoption thresholds:
  - Decisions 1, 2, 3, 4, 5, 6, 8, and 9 may be adopted by a majority of the votes cast.
  - Decision 7 may be adopted by a 70 percent majority of the total voting power.
- Specific allocations and transfers for FY 2013 (selected exact figures):
  - SDR Department assessment: special drawing right holdings accounts of participants shall be debited on April 30, 2013 with an amount equal to 0.00056283 percent of their net cumulative allocations of special drawing rights.
  - MDRI-I Trust reimbursement for FY 2013: equivalent of SDR 0.019 million to the General Resources Account.
  - PCDR Trust reimbursement for FY 2013: equivalent of SDR 0.039 million to the General Resources Account.
  - PRGT administration cost transfer for FY 2013: an amount equivalent to SDR 52.21 million transferred from the Reserve Account of the PRGT to the General Resources Account.
  - Transfer of income from the Fixed Income Subaccount of the Investment Account for FY 2013 to the General Resources Account (for meeting FY 2013 expenses).

### Annex III — Investment Account (IA) performance scenarios (Fixed-income Subaccount)
- Market context and risks:
  - Government bond yields in the markets of the SDR basket remain close to their historical lows, and those within the 1–3 year index range are near the zero bound.
  - Market-implied one-year forward yields in SDR terms for bonds in the 1–3 year segment are about 19 basis points higher than current levels (Figure 5).
  - The magnitude of the expected rate increase (19 basis points) is lower than what was expected a year ago (increase of 26 bps).
  - With yields very close to zero, and therefore limited income protection, there is a short-term risk of very low return, or of capital loss or underperformance against the three-month SDR rate if yields rise even moderately.
  - The IA follows a long term investment strategy and periods of short-term underperformance should be expected; over time, higher average yields will benefit the IA’s performance both in absolute terms and relative to the SDR rate.
- Portfolio composition and investment authority:
  - Investment in marketable obligations of members whose currencies are used for investment, including obligations of their central banks and official agencies, and marketable obligations of international financial organizations such as the World Bank, the European Investment Bank and the Bank for International Settlements (BIS).
  - IA portfolio currently comprises bonds of countries in the euro area, Japan, the United Kingdom, and the United States, with a minimum credit rating of A, and BIS medium-term instruments (MTIs).
  - MTIs are obligations of the BIS; their yield is based on the swap yield curve and typically provide a higher initial yield than comparable government bonds, but are subject to risk from widening swap spreads.
- Return scenarios assessed (relative to the three-month SDR rate):
  - Scenarios analyzed:
    - Yields remain unchanged from early March 2013 levels;
    - Yields follow market forward rates (as in Figure 4);
    - Yields increase by 25 basis points above market forward rates;
    - Yields increase by 50 basis points above market forward rates;
    - Yields increase by 100 basis points above market forward rates;
    - Bond yields increase by 100 basis points above market forward rates and swap spreads on MTIs widen by an additional 50 basis points (i.e., MTI yields increase by 150 basis points above forwards).
  - Key interpretation:
    - Positive returns could be achieved if rates stay unchanged, though modest (0.17 percent).
    - Against the SDR interest rate, the IA could break even if bond yields rise by 10 basis points less than implied by market forwards (i.e., bond yields increase by 7 basis points over the next fiscal year).
    - A rise in yields in line with or above current market expectations could result in capital losses.
- Table 7 — Unannualized returns (percent) and assumed yields (selected rows)
  - Actual Returns FYTD (May 2012-February 2013)
    - 3-Month SDR/GRA 0.07
    - Bond 0.66
    - MTIs 0.88
    - IA 0.76
    - Excess Return 0.68
  - FY 2013 (May 2012-April 2013) — Unannualized returns under scenarios
    - 3-Month SDR/GRA 0.09 | 0.09 | 0.10 | 0.10 | 0.11 | 0.11
    - Bond 0.69 | 0.64 | 0.56 | 0.49 | 0.35 | 0.35
    - MTIs 0.92 | 0.87 | 0.79 | 0.72 | 0.58 | 0.43
    - IA 0.79 | 0.74 | 0.66 | 0.59 | 0.45 | 0.38
    - Excess Return 0.70 | 0.64 | 0.57 | 0.49 | 0.33 | 0.27
  - FY 2014 (May 2013-April 2014) — Unannualized returns under scenarios
    - 3-Month SDR 0.10 | 0.16 | 0.34 | 0.52 | 0.87 | 0.87
    - Bond 0.15 | -0.05 | -0.33 | -0.62 | -1.18 | -1.18
    - MTIs 0.21 | 0.01 | -0.28 | -0.56 | -1.13 | -1.69
    - IA 0.17 | -0.03 | -0.31 | -0.59 | -1.16 | -1.40
    - Excess Return 0.07 | -0.19 | -0.65 | -1.11 | -2.03 | -2.27
  - Memo Items: Assumed Yields (Spot | 1 year forward)
    - 3-Month SDR/GRA 0.10 | 0.18
    - Bonds 0.15 | 0.32
    - MTIs 0.21 | 0.38
- Income of gold sales proceeds and endowment subaccount:
  - Phase-in plan:
    - Expected to take place gradually, starting in the course of the third quarter of FY 2013, and spanning a three-year period.
    - The share of gold sales profits to be placed in the IA’s endowment subaccount is currently invested in fixed-term deposits with the BIS as an interim measure.
    - This interim arrangement is intended to ensure the funds are liquid and do not face any risk of capital loss.
  - Projection caveat:
    - Setting an income projection in FY 2014 for the endowment subaccount is subject to considerable market uncertainty, in part due to the higher volatility of the markets in which funds will be invested, compared with the current IA’s fixed income subaccount.

### Annex VI — Cumulative burden sharing adjustments (selected table values)
- Table listing cumulative burden sharing adjustments at end–January 2013 (in millions of SDRs).
- Key totals (final rows as presented):
  - 356.1    353.9    710.0    100.0    603.8    583.9    1,187.7    100.0
- Selected country-level figures (exact values as presented):
  - United States: -    101.9    101.9    14.4    -    157.9    157.9    13.3
  - Japan: -    39.9    39.9    5.6    -    64.5    64.5    5.4
  - Mexico: 38.3    0.7    39.0    5.5    57.0    1.2    58.2    4.9
  - China: 4.0    7.8    11.9    1.7    3.5    16.2    19.7    1.7
  - Turkey: 26.3    0.3    26.6    3.7    50.9    0.5    51.4    4.3
  - India: 24.0    2.5    26.5    3.7    28.4    3.4    31.9    2.7
  - Russian Federation: 23.7    0.2    24.0    3.4    61.9    -    61.9    5.2
  - Brazil: 23.8    0.1    23.9    3.4    57.4    -    57.4    4.8
  - Korea: 7.8    3.4    11.2    1.6    19.6    5.0    24.6    2.1
  - Philippines: 9.2    0.4    9.6    1.4    14.4    0.6    15.0    1.3
  - Saudi Arabia: -    10.8    10.8    1.5    -    17.1    17.1    1.4
  - Germany: -    38.5    38.5    5.4    -    59.1    59.1    5.0
  - United Kingdom: -    13.4    13.4    1.9    -    25.8    25.8    2.2
  - Italy: -    17.7    17.7    2.5    -    28.2    28.2    2.4
  - France: -    18.9    18.9    2.7    -    33.5    33.5    2.8

*Review of the Fund’s Income Position for FY 2013 and FY 2014 (selected excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### FY 2013 income position and key projections
- FY 2013 net income is now projected at SDR 2.0 billion, including surcharges, broadly in line with the midyear estimate of SDR 2.1 billion.
- Precautionary balances are expected to reach SDR 11.5 billion at the end of FY 2013.
- Updated breakdowns and drivers:
  - Operational lending income (margin, service charges, and commitment fees): about SDR 1.5 billion; the current estimate is SDR 1,457 million (Table 1).
    - Margin for the rate of charge: SDR 919 million.
    - Service charges: SDR 157 million.
    - Commitment fees: SDR 481 million.
  - Surcharge income: SDR 1,242 million.
  - Investment Account (IA) income for FY 2013:
    - Fixed-income subaccount (reserves portfolio): SDR 58 million.
    - Endowment subaccount (gold profits portfolio): SDR 6 million.
    - Temporary windfall profits subaccount: SDR 0.036 million.
    - Total IA income: SDR 64 million (about SDR 9 million lower than the midyear estimate).
  - Reimbursements to the General Resources Account (GRA) in FY 2013:
    - Expenses of the SDR Department: SDR 1.149 million (to be recovered via assessment on participants in the SDR Department; proposed Decision 1).
    - MDRI-I expenses: SDR 0.019 million (proposed Decision 2).
    - PCDR Trust expenses: SDR 0.039 million (proposed Decision 3).
    - PRGT expenses to be reimbursed to the GRA: SDR 52.21 million (proposed Decision 4).
  - Net expenses are expected to be about SDR 22 million lower than projected.
    - Net administrative expenditures: projected about SDR 31 million lower than budgeted.
    - Lower capital project expenses (IT and facilities): about SDR 4 million lower.
    - Movements in the U.S. dollar/SDR exchange rate reduce the savings by about SDR 13 million.
  - IAS 19 timing difference: IAS 19 expense for FY 2013 of SDR 249 million versus funding projected at SDR 102 million yields a timing difference of SDR 147 million that decreases net income.

### Disposition decisions and IA income treatment
- The paper includes decisions relating to the disposition of FY 2013 income consistent with recent practice.
- IA structure and use of IA income:
  - The IA has three subaccounts:
    - Fixed-income subaccount (funded by transfers of currencies from the GRA equivalent to the Fund’s total reserves in June 2006, plus subsequent transfers of GRA net income not associated with gold profits).
    - Endowment subaccount (funded with gold profits other than windfall profits).
    - Temporary windfall profits subaccount (funded by GRA currency transfers attributed to windfall gold profits, to be used to fund a partial distribution of the general reserve to the membership for the benefit of the PRGT).
  - Under the Articles, IA investment income may be invested, held in the IA, or used for meeting the expenses of conducting the business of the Fund.
  - Prior practice for the fixed-income subaccount has followed a two-step approach:
    - Transfer IA income from the fixed-income subaccount to the GRA to meet administrative expenses, increasing GRA net income and resources for placement to GRA reserves.
    - Increased reserves provide scope for further transfers of GRA currencies to the IA, expanding the IA corpus.

### Margin for the basic rate of charge and FY 2014 outlook
- In April 2012 the Executive Board applied the new Rule I-6(4) for setting the margin for the basic rate of charge and established a margin of 100 basis points for FY 2013–14.
- Staff completed a full analysis as required under the Rule and determined there have not been fundamental changes that would warrant a change in the margin for FY 2014.
- Updated projections for FY 2014:
  - Net income position of SDR 1.6–1.8 billion, compared with the April 2012 estimate of SDR 2.1 billion.
  - The updated projections reflect:
    - Lower lending income, primarily due to the expiration of arrangements with undrawn balances.
    - Lower non-lending income as a result of low global interest rates and the agreement to phase in investments under the new gold-sales funded endowment.
  - The projections are subject to considerable uncertainty and are sensitive to a number of assumptions.

### Institutional and policy notes
- The paper provides the comprehensive review required under Rule I-6(4) and proposes no change in the margin for the rate of charge.
- The resumption of reimbursement to the GRA for PRGT administrative expenses in FY 2013 aligns with the financing strategy approved in September 2012 aimed at placing concessional lending on a self-sustaining basis over the longer term; the strategy establishes a base lending envelope of SDR 1¼ billion annually by using already available resources and contributions linked to remaining windfall gold profits and assumes reimbursement to resume in FY 2013.
- A proviso in the PRGT financing strategy allows for temporary suspension of reimbursement if demand for PRGT borrowing exceeds the base envelope by a substantial margin for an extended period.

### Key statistics (as presented)
- Net operational income position (A–B): SDR 912 million.
- Net income position (IFRS basis): SDR 2,013 million.
- Fund credit (average stock): 100.6 / 93.3 / 91.9 (SDR billions) as presented in Table 1.
- SDR interest rate (average, in percent): 0.3 / 0.1 / 0.1.
- US$/SDR exchange rate (average): 1.55 / 1.55 / 1.52.
- Precautionary balances (end of period, SDR billions): 11.8 / 11.6 / 11.5.

*April 30, 2013 — REVIEW OF THE FUND’S INCOME POSITION FOR FY 2013 AND FY 2014 (EXECUTIVE SUMMARY).*

### 7. Staff proposes that income in the subaccounts of the IA be used as follows:

### _043013a - 7. Staff proposes that income in the subaccounts of the IA be used as follows:

### Disposition of Investment Account (IA) subaccount income
- Fixed-Income Subaccount (reserves portfolio)
  - Staff proposes that the estimated FY 2013 income of SDR 58 million be transferred to the GRA to be used towards meeting the expenses of the Fund (proposed Decision 5).
  - By so doing the IA income will contribute to the GRA net operational income, which will be placed in the Fund’s reserves.
- Endowment Subaccount
  - Staff proposes that the projected income of SDR 6 million be retained in the IA.
  - According to the Rules and Regulations for the Investment Account, no income from the endowment subaccount may be used for meeting the expenses of the Fund pending the completion of the phasing period, which is expected to start in mid-FY 2014.
  - No Board decision is required for reinvestment of earnings.
- Temporary Windfall Profits Subaccount
  - The income from this portfolio of about SDR 0.036 million will be retained in the IA until the partial distribution of the general reserve is executed in accordance with already approved Board decisions.

### Placement of GRA net income and surcharges to reserves
- Staff proposes that the GRA net operational income estimated at SDR 765 million be placed in the special reserve (proposed Decision 6).
- Staff proposes that net income equivalent to the FY 2013 surcharges estimated at SDR 1.2 billion be placed to the general reserve (proposed Decision 6).
- Projected precautionary balances at end-FY 2013 after transfers:
  - Total: SDR 11.5 billion
  - Special reserve: SDR 4.2 billion
  - General reserve: SDR 6.1 billion
  - SCA-1 balance: SDR 1.2 billion
- Note: The special reserve remains well below the SDR 10 billion floor established by the Board for precautionary balances.

### Transfers between GRA and IA; Fixed-Income Subaccount investment objective
- Consistent with past practice, staff proposes to transfer currencies equivalent to the increase in the general and special reserves of SDR 2.0 billion from the GRA to the IA for investment in the Fixed-Income Subaccount (the maximum amount permitted under the Articles).
- Objective of the Fixed-Income Subaccount: achieve investment returns that exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12 month investment horizon.
- While risks of under-performance have increased in the current low interest rate environment, staff proposes to transfer the maximum amount permitted under the Articles, currently estimated at SDR 2.0 billion to the IA for investment (proposed Decision 7).

### FY 2014 income outlook, margin decision, and key projections
- Decision on margin for basic rate of charge:
  - In April 2012 the Executive Board set the margin at 100 basis points for the period FY 2013–2014 under Rule I-6(4).
  - Staff concludes no change in the margin for FY 2014 is warranted (Decision 8) because there have been no fundamental changes in the factors relevant for establishing the margin.
- Intermediation costs and lending-related income
  - Intermediation costs for FY 2014 are projected at US$96 million.
  - Income from the margin is projected at about US$1.3 billion (earlier estimate US$1.5 billion; projected outcome for FY 2013 about US$1.4 billion).
  - Commitment fee income is projected at about US$29 million.
  - Surcharge income is projected at US$1.9–2.2 billion.
- Market cross-check
  - EMBI spreads, adjusted for risk and term premiums, suggest the alignment of the current margin of 100 basis points with long-term credit market conditions is broadly in line with recent years.
- FY 2014 net income projections (updated)
  - Based on the current margin, updated projections for FY 2014 indicate a net income of about SDR 1.6–1.8 billion compared with the earlier estimate of SDR 2.1 billion.
- Lending and interest-rate sensitivities
  - Average credit is now projected to be about SDR 88.2 billion in FY 2014 (some SDR 9 billion lower than projected last April).
  - The decline in average credit reduces income from the margin by about SDR 90 million, partially offset by increases in service charge and commitment fees of SDR 12 million and SDR 10 million, respectively.
  - Surcharge income is expected to generate about SDR 1.3–1.5 billion towards FY 2014 income.

### IA investment income and assumptions
- IA investment income revisions
  - FY 2014 IA investment income is expected to be about SDR 264 million lower than estimated in April reflecting low global interest rates and the decision not to initiate pay-outs from the endowment until phased investment of the passively-managed gold portion is completed.
- Fixed-Income Subaccount assumed premium over SDR rate
  - Updated projections reflect an expected return over the SDR interest rate of 7 basis points (the previous estimates assumed 50 basis points).
  - Projections assume a gradual build up of the premium to 100 basis points by FY 17 following a phased approach for the investment mandate.
  - Short-term performance is subject to considerable uncertainty given low interest rates and the risk of rising interest rates.
- Interest-free resources and reimbursements
  - Implicit returns on interest-free resources are about SDR 15 million lower due to low global interest rates.
  - Projected reimbursements to the GRA have decreased by about SDR 12 million based on updated expenditure projections.

### Key consolidated figures (selected from Table 2 and text)
- Fixed-Income Subaccount FY 2013 estimated income to transfer to GRA: SDR 58 million
- Endowment Subaccount projected income retained in IA: SDR 6 million
- Temporary Windfall Profits Subaccount income retained in IA: SDR 0.036 million
- Proposed GRA net operational income to special reserve: SDR 765 million
- FY 2013 surcharges to general reserve: SDR 1.2 billion
- Proposed GRA→IA currency transfer for reserves investment (maximum permitted): SDR 2.0 billion
- Intermediation costs (FY 2014 projection): US$96 million
- Margin income (FY 2014 projection): about US$1.3 billion
- Commitment fee income (FY 2014 projection): about US$29 million
- Surcharge income (FY 2014 projection): US$1.9–2.2 billion
- FY 2014 net income (updated projection): about SDR 1.6–1.8 billion
- Average fund credit (FY 2014 projection): SDR 88.2 billion
- IA fixed-income expected premium over SDR interest rate (FY 2014 projection): 7 basis points; gradual build to 100 basis points by FY 17
- Reduction in FY 2014 IA investment income versus April estimate: SDR 264 million
- Projected precautionary balances at end-FY 2013: SDR 11.5 billion (SDR 4.2 billion special reserve; SDR 6.1 billion general reserve; SDR 1.2 billion SCA-1)

*Source: Review of the Fund’s Income Position for FY 2013 and FY 2014 (selected excerpts).*

### 15. Burden sharing adjustments are expected to remain low in FY 2014 (see Table 4 below).

### _043013a - 15. Burden sharing adjustments are expected to remain low in FY 2014 (see Table 4 below).

### Burden sharing adjustments — key findings
- Given current levels of overdue obligations, sharply higher lending and the prevailing low interest rate environment, burden sharing adjustments remain at very low levels.
- The Board amended the decision on burden sharing in FY 2010 to take account of the low burden sharing adjustments and allow for a “carry-forward” of excess amounts generated from a minimum adjustment of 1 basis point to the rate of charge and the rate of remuneration.
- If the amounts brought forward are sufficient to offset deferred charges in subsequent quarter(s), no adjustments are necessary for such quarters. This occurred in the third quarter of FY 2013.
- Going forward, burden sharing adjustments are expected to remain low, with adjustments projected for the third quarter of FY 2014.

### Table 4 / recent rates (as presented)
- Average SDR interest rate (in percent) series (FY06–FY13, FY14 projected): 2.93, 3.96, 3.64, 1.79, 0.29, 0.35, 0.30, 0.12, 0.08, 0.07, 0.10, 0.10, 0.14, 0.17, 0.15
- Average basic rate of charge (in percent) series (FY06–FY13, FY14 projected): 4.00, 5.04, 4.72, 2.79, 1.29, 1.35, 1.30, 1.12, 1.08, 1.07, 1.10, 1.10, 1.14, 1.17, 1.15
- Note: The SDR interest rates are projected to average 0.1 percent in FY 2014.

### Review of special charges — findings and decisions
- The decision on special charges on overdue financial obligations in the GRA and the Trust Fund calls for an annual review.
- Under the current system, special charges are levied on repurchases and charges in arrears for more than 10 days.
- Special charges on GRA obligations that are overdue for six months or more were eliminated effective May 1, 1992.
- No special charges have arisen during FY 2013 and no new considerations have arisen during the financial year.
- No changes are proposed to the current system (proposed Decision 9).

### Proposed decisions pertaining to FY 2013 and FY 2014 (summary)
- Decisions pertaining to FY 2013:
  - Decision 1: assessment on SDR Department participants for reimbursement of General Department expenses for FY 2013.
  - Decision 2: reimbursement to the General Resources Account for cost of administering SDA resources in the MDRI-I Trust in FY 2013.
  - Decision 3: reimbursement to the General Resources Account for cost of administering SDA resources in the PCDR Trust in FY 2013.
  - Decision 4: reimbursement to the General Resources Account for cost of administering the PRGT in FY 2013.
  - Decision 5: transfer of income from the Investment Account to the General Resources Account for use in meeting FY 2013 administrative expenses.
  - Decision 6: placement of FY 2013 net income to the Fund’s Special Reserve and General Reserve.
  - Decision 7: transfer of currencies from the GRA to the Investment Account equivalent to the increase of the special and general reserve as a result of placement of FY 2013 net income.
- Decision pertaining to FY 2014:
  - Decision 8: maintains the rate of charge on the use of Fund resources for FY 2014 at 100 basis points over the SDR interest rate.
  - Decision 9: reviews the system of special charges.
- Adoption thresholds:
  - Decisions 1, 2, 3, 4, 5, 6, 8, and 9 may be adopted by a majority of the votes cast.
  - Decision 7 may be adopted by a 70 percent majority of the total voting power.

### Specific allocations and transfers for FY 2013 (selected exact figures)
- SDR Department assessment: special drawing right holdings accounts of participants shall be debited on April 30, 2013 with an amount equal to 0.00056283 percent of their net cumulative allocations of special drawing rights.
- MDRI-I Trust reimbursement for FY 2013: equivalent of SDR 0.019 million to the General Resources Account.
- PCDR Trust reimbursement for FY 2013: equivalent of SDR 0.039 million to the General Resources Account.
- PRGT administration cost transfer for FY 2013: an amount equivalent to SDR 52.21 million transferred from the Reserve Account of the PRGT to the General Resources Account.
- Transfer of income from the Fixed Income Subaccount of the Investment Account for FY 2013 to the General Resources Account (for meeting FY 2013 expenses).

### Framework on the margin for the rate of charge and income position (key figures and projections)
- Under new Rule I-6(4), the margin for the two financial years FY 2013–2014 was set at 100 basis points.
- FY 2014 intermediation costs estimated at US$96 million compared with an estimate of US$111 million in April 2012.
- Income from service charges projected at US$101 million (SDR 67 million) in FY 2014 and projected to cover 100 percent of intermediation costs in FY 2014.
- Income from the margin (assuming unchanged margin of 100 basis points) projected at about US$1.3 billion (SDR 882 million).
- Table 5 highlights (in millions of U.S. Dollars, unless otherwise indicated):
  - A. Intermediation costs (selected years): FY 2010 119; FY 2011 111; FY 2012 108; FY 2013 current 95; FY 2013 adjusted 119; FY 2014 estimate 69; FY 2014 updated estimate 96
  - B. Service charges (selected years): FY 2010 164; FY 2011 205; FY 2012 250; FY 2013 current 878; FY 2013 adjusted 510; FY 2014 estimate 110; FY 2014 updated estimate 101
  - C. Costs to be covered by income from margin (A-B) (selected values): -45, -94, -142, 826, -5, -5
  - D. Income from margin (100 basis points) (selected years): 53, 48, 271, 1,248, 1,397, 1,505, 1,323, 1,323
  - E. Commitment fees (selected years): 12, 72, 54, 37, 73, 11, 42, 9, 29
  - F. Surcharges (selected years): 40, 67, 79, 1,403, 1,888, 1,969, 1,914, 2,202
  - G. Potential reserve accumulation (D+E+F-C) (selected years): 1,112; 1,954; 2,830; 4,008; 3,462; 3,270; 3,558
  - H. Potential reserve accumulation (as a percent): 10.0%; 17.4%; 22.5%; 27.8%; 18.9%; 19.0%; 20.6%
  - I. Actual reserve accumulation (selected years): 354; 1,203; 2,283; 3,052; 3,083; 2,414; 2,702
  - J. Actual reserve accumulation (as a percent): 3.2%; 10.7%; 18.2%; 21.1%; 16.9%; 14.0%; 15.7%
  - K. Precautionary balances at the end of FY (in SDR billions) (selected years): 7.3; 8.1; 9.5; 11.5; 13.8; 13.2; 13.3
- Memorandum items:
  - Average Fund credit outstanding (in SDR billions) (selected values): 34.2; 53.7; 80.5; 91.9; 97.1; 88.2; 88.2
  - Average exchange rate US$/SDR (selected values): 1.56; 1.54; 1.55; 1.52; 1.55; 1.50; 1.50
- Reserve accumulation specifics for FY 2014:
  - Expected commitment fees about US$29 million (SDR 19 million).
  - Surcharge income projected about US$1.9–2.2 billion (SDR 1.3–1.5 billion).
  - Estimated potential reserve accumulation for FY 2014 with a margin of 100 bps: about US$3.3–3.6 billion.
  - Actual reserve accumulation projected at about US$2.4–2.7 billion or SDR 1.6–1.8 billion.

### Alignment of the margin with long-term credit market conditions
- The new rule includes a market cross-check mechanism using EMBI spreads to compare the margin to long-term credit market conditions.
- Two adjustments applied to the EMBI-based metric:
  - Risk premium adjustment: compares to the lowest quartile of EMBI spreads to reflect lower credit risks the Fund faces as a cooperative public policy institution.
  - Term premium adjustment: accounts for the difference between the SDR interest rate (floating, three-month instruments) and the comparator EMBI measure (five-year fixed instruments).
- Comparator spreads and margins (median SDR-equivalent basis points, selected series):
  - Composite EMBI and countries in the lowest quartile (multiple sample periods provided).
  - The lowest quartile of the EMBI adjusted for the term premium for the five-year period ending in February 2013 rose 3 basis points from 154 to 157 basis points since last year.
- Conclusion: while recent EMBI spreads have declined, the alignment of the current margin with long-term credit market conditions is broadly unchanged.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_043013a.pdf*

### Annex III. Investment Account (IA) Performance Scenarios

### Annex III. Investment Account (IA) Performance Scenarios

### Fixed income subaccount — overview and risks
- Government bond yields in the markets of the SDR basket remain close to their historical lows, and those within the 1–3 year index range are near the zero bound.
- With growth and inflation expectations increasing only slowly, or being revised down in some cases, policy makers in SDR markets remain committed to keeping low rates for an extended period.
- Market-implied one-year forward yields in SDR terms for bonds in the 1–3 year segment are about 19 basis points higher than current levels (Figure 5).
- The magnitude of the expected rate increase (19 basis points) is lower than what was expected a year ago (increase of 26 bps).
- With yields very close to zero, and therefore limited income protection, there is a short-term risk of very low return, or of capital loss or underperformance against the three-month SDR rate if yields rise even moderately.
- The IA follows a long term investment strategy and periods of short-term underperformance should be expected; over time, higher average yields will benefit the IA’s performance both in absolute terms and relative to the SDR rate.
- Portfolio composition and investment authority (current as described):
  - Investment in marketable obligations of members whose currencies are used for investment, including obligations of their central banks and official agencies, and marketable obligations of international financial organizations such as the World Bank, the European Investment Bank and the Bank for International Settlements (BIS).
  - IA portfolio currently comprises bonds of countries in the euro area, Japan, the United Kingdom, and the United States, with a minimum credit rating of A, and BIS medium-term instruments (MTIs).
  - MTIs are obligations of the BIS; their yield is based on the swap yield curve and typically provide a higher initial yield than comparable government bonds, but are subject to risk from widening swap spreads.

### IA return scenarios assessed (relative to the three-month SDR rate)
- Scenarios analyzed for impact on IA income through end-FY 2013 and in FY 2014:
  - Yields remain unchanged from early March 2013 levels;
  - Yields follow market forward rates (as in Figure 4);
  - Yields increase by 25 basis points above market forward rates;
  - Yields increase by 50 basis points above market forward rates;
  - Yields increase by 100 basis points above market forward rates;
  - Bond yields increase by 100 basis points above market forward rates and swap spreads on MTIs widen by an additional 50 basis points (i.e., MTI yields increase by 150 basis points above forwards).
- Key interpretation:
  - Positive returns could be achieved if rates stay unchanged, though modest (0.17 percent).
  - Against the SDR interest rate, the IA could break even if bond yields rise by 10 basis points less than implied by market forwards (i.e., bond yields increase by 7 basis points over the next fiscal year).
  - A rise in yields in line with or above current market expectations could result in capital losses.
- Note: The assumption of rates decreasing by 25 and 50 basis points below market forwards is not considered since yields would become negative.

### Table 7 — Unannualized returns (percent) and assumed yields
- Actual Returns FYTD (May 2012-February 2013)
  - 3-Month SDR/GRA 0.07
  - Bond 0.66
  - MTIs 0.88
  - IA 0.76
  - Excess Return 0.68
- FY 2013 (May 2012-April 2013) — scenario columns: Unchanged Yields 1/ | Forwards | Forwards +25bps | Forwards +50bps | Forwards +100bps | Forwards +100bps +50 bps MTI Spreads Widening
  - 3-Month SDR/GRA 0.09 | 0.09 | 0.10 | 0.10 | 0.11 | 0.11
  - Bond 0.69 | 0.64 | 0.56 | 0.49 | 0.35 | 0.35
  - MTIs 0.92 | 0.87 | 0.79 | 0.72 | 0.58 | 0.43
  - IA 0.79 | 0.74 | 0.66 | 0.59 | 0.45 | 0.38
  - Excess Return 0.70 | 0.64 | 0.57 | 0.49 | 0.33 | 0.27
- FY 2014 (May 2013-April 2014) — scenario columns as above
  - 3-Month SDR 0.10 | 0.16 | 0.34 | 0.52 | 0.87 | 0.87
  - Bond 0.15 | -0.05 | -0.33 | -0.62 | -1.18 | -1.18
  - MTIs 0.21 | 0.01 | -0.28 | -0.56 | -1.13 | -1.69
  - IA 0.17 | -0.03 | -0.31 | -0.59 | -1.16 | -1.40
  - Excess Return 0.07 | -0.19 | -0.65 | -1.11 | -2.03 | -2.27
- Memo Items: Assumed Yields (Spot | 1 year forward)
  - 3-Month SDR/GRA 0.10 | 0.18
  - Bonds 0.15 | 0.32
  - MTIs 0.21 | 0.38
- Sources: State Street data, Bloomberg, and staff calculations.
- Note: Actual returns are based on audited performance data provided by State Street. Projections are based on current market levels for SDR weighted 3-month bills, and 2-year government notes, and 2-year MTIs, and on government bond forward rates.
- Footnote: 1/ From March 6, 2013.

### Income of gold sales proceeds and endowment subaccount
- With the approval by the Executive Board of the Rules and Regulations for the IA, work is under way to begin investing gold sales proceeds in the endowment subaccount in line with the endowment’s strategic asset allocation (SAA).
- Phase-in plan:
  - Expected to take place gradually, starting in the course of the third quarter of FY 2013, and spanning a three-year period.
  - The share of gold sales profits to be placed in the IA’s endowment subaccount is currently invested in fixed-term deposits with the BIS as an interim measure.
  - This interim arrangement is intended to ensure the funds are liquid and do not face any risk of capital loss.
- Projection caveat:
  - Setting an income projection in FY 2014 for the endowment subaccount is subject to considerable market uncertainty, in part due to the higher volatility of the markets in which funds will be invested, compared with the current IA’s fixed income subaccount.
- Footnotes relevant to the endowment:
  - 1/ The figures are based on a general assumption that investment income is transferred annually to the GRA shortly after the year-end based on the final audited figures.
  - 2/ This balance represents the IA portion funded from the gold endowment and the temporary windfall gold profits subaccount. The projections assume that the windfall profits will be distributed in the second half of FY 2014.
  - 3/ End-February figure is unannualized.
  - 4/ The FY 2014 projected returns for the gold endowment reflect the phase in of investments under the strategic asset allocation and the earnings from the short-term deposits held in the interim.

*Source: Annex III. Investment Account (IA) Performance Scenarios (from the provided IMF content).*

### Annex VI. Cumulative Burden Sharing Adjustments

### Annex VI. Cumulative Burden Sharing Adjustments

### Overview
- Table listing cumulative burden sharing adjustments at end–January 2013 (in millions of SDRs).
- Columns (as presented): Member Charges; Remuneration; Total; % of total; Charges; Remuneration; Total; % of total.
- 1/ Adjustments to charges and remuneration are billed quarterly.
- Note: Values of 0.0 represent amounts of less than SDR 0.1 million; "-" denotes no adjustments.

### Key totals (final rows as presented)
- 356.1    353.9    710.0    100.0    603.8    583.9    1,187.7    100.0

### Selected country-level figures (exact values as presented)
- United States: -    101.9    101.9    14.4    -    157.9    157.9    13.3
- Japan: -    39.9    39.9    5.6    -    64.5    64.5    5.4
- Mexico: 38.3    0.7    39.0    5.5    57.0    1.2    58.2    4.9
- China: 4.0    7.8    11.9    1.7    3.5    16.2    19.7    1.7
- Turkey: 26.3    0.3    26.6    3.7    50.9    0.5    51.4    4.3
- India: 24.0    2.5    26.5    3.7    28.4    3.4    31.9    2.7
- Russian Federation: 23.7    0.2    24.0    3.4    61.9    -    61.9    5.2
- Brazil: 23.8    0.1    23.9    3.4    57.4    -    57.4    4.8
- Korea: 7.8    3.4    11.2    1.6    19.6    5.0    24.6    2.1
- Philippines: 9.2    0.4    9.6    1.4    14.4    0.6    15.0    1.3
- Saudi Arabia: -    10.8    10.8    1.5    -    17.1    17.1    1.4
- Germany: -    38.5    38.5    5.4    -    59.1    59.1    5.0
- United Kingdom: -    13.4    13.4    1.9    -    25.8    25.8    2.2
- Italy: -    17.7    17.7    2.5    -    28.2    28.2    2.4
- France: -    18.9    18.9    2.7    -    33.5    33.5    2.8

### Notes on presentation and interpretation
- All numeric values reproduced exactly as presented in the source table.
- The table includes many additional country-specific rows with the same column structure; the above bullets list selected large or representative entries directly from the table.

*Source: Annex VI. Cumulative Burden Sharing Adjustments at end–January 2013 (in millions of SDRs).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_043013a.pdf_